Texas Private Equity Conference 2022: Session II: The Role of Private Equity and Debt in Reshaping the Ownership, Valuation, and Governance of Private Companies

Abstract

Although the phenomenal growth of private equity investments into a $2 trillion market has been widely recognized, little is known about the recent rise of the private credit market, which has doubled to over $1 trillion in the past five years and generated annual returns of close to 9% during the past 15 years. In this panel, three private and public debt professionals discuss the interplay between private equity and debt, pricing pressures, competition for assets, and deal terms for private equity and debt investors in an increasing-interest-rate environment.

Direct lending to PE-owned firms has expanded dramatically since the 2008 global financial crisis, driven in significant part by the effect of Dodd-Frank on traditional banks' lending to their core middle market segment. Alternative lenders such as Blackstone and Ares Capital Management have filled the resulting void in this large market. While much of this activity is direct lending to those small and mid-market companies, another major part is structured or asset-backed lending to a discrete pool of assets wherein repayment of that debt is derived solely from the contractual cash flows coming off those assets rather than from the company.

Morgan Stanley's Vanessa Roberts explains how the private debt markets, as evidenced by their continued growth, complement public debt markets without supplanting them. But as Phil Canfield emphasized, private equity sponsors value the speed of execution and certainty of commitment along with fewer public disclosures that come with private credit. It's typically a less complex process, one that removes regulatory obstacles to risk-reducing structures and ends up providing more flexible solutions. What's more, the dramatic expansion of private capital pools in 2021 has brought much more liquidity to the market and accelerated the move toward cash-flow-based lending.